BNY Mellon Strengthens Fixed Income Offerings With Cutwater Acquisition

Earlier this week, Bank of New York Mellon (NYSE:BK) announced plans to expand its fixed income business by acquiring Cutwater Asset Management – a subsidiary of the municipal bond insurance giant MBIA. ((BNY Mellon to Acquire U.S. Investment Manager Cutwater Asset Management, BNY Mellon Press Releases, Oct 6 2014)) New York-based Cutwater manages around $23 billion in fixed income assets, which will complement the $1.6 trillion in assets managed by BNY Mellon’s investment management division. The deal, financial details of which have not been disclosed, is expected to close in the first quarter of 2015.

Notably, fixed income products form the second-smallest percentage of asset management offerings by BNY Mellon Investment Management (after alternative products), and the deal is clearly aimed at presenting clients with more fixed income options in the future.

We are currently in the process of updating our $37 price estimate for BNY Mellon’s stock to include this acquisition in our analysis of the custody banking giant.

See our full analysis for BNY Mellon here

As the world’s largest custody bank, BNY Mellon relies most on its services as a custodian to generate value. However, as can be seen from the chart above, the bank’s asset and wealth management operations are nearly as important to its business model – contributing 27% of its total value.

At the end of the second quarter of the year, the investment management division reported record assets under management (AUM) figures of $1.64 trillion. This AUM figure includes assets in equity, fixed income, index-linked, currency, alternative as well as money market funds. According to a detailed breakup of its AUM provided by BNY Mellon last quarter, fixed income assets account for just 14% of this figure – or roughly $230 billion. On the other hand, Cutwater has been able to grow its asset base to $23 billion over the years by offering a wide range of fixed income strategies such as core, long duration, high yield, loans and absolute return strategies. The acquisition of Cutwater will boost BNY Mellon’s fixed-income offerings by about 10% and increase the proportion of these assets in its total portfolio to above 15% when the deal closes.

You can see how an increase in the size of assets under management for BNY Mellon affects its share value by making changes to the chart below.

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